The Herd Mentality

The impact of peer pressure on the housing market is explored today in the Real Estate section of the Los Angeles Times:

The urge to follow the herd leads to spending beyond one's means or failing to set realistic sales prices, behavioral economists say. Or forgetting that bison sometimes stampede off cliffs, buyers see "everyone" buying homes and gaining equity, and they want in too. There's always safety in numbers, consumers assure themselves, and if they make a mistake, the misery can be shared.

During the bull market, buyers feared being priced out of the market. This thinking may account for the fact that higher-risk negative-amortization loans made up 17.4% of all loans in California through July of this year , up from 14.8% in 2005, according to First American LoanPerformance, a data-tracking firm.

Once in, overextended buyers often become victims of "bubble thinking," said Richard L. Peterson, a psychiatrist and managing partner of San Francisco-based Market Psychology Consulting. Buyers gamble that the value of their homes will increase, even if they're losing money every month due to negative amortization loans and lack of equity actually accruing.

— TJ Sullivan in LA